Best practices, updated every Wednesday

January 19, 2011

Why alternative fee revenues will keep going up

In 2010, 60% of Tucker Ellis & West’s revenues came from non-hourly fees. In the seven years since the firm was founded, alternative fee arrangements (AFAs) have been growing in importance year by year. The firm currently has 160 lawyers in Ohio, California and Colorado, and AFAs now account for the majority of their income.

Managing partner Joe Morford expects that AFAs will continue to grow in the future, because this is a one-way street. While it can take time for a client to take the leap and try non-hourly fees, once they do so they become converts for life. “Once we started working for a client with AFAs, not a single one has ever wanted to go back to hourly.”

When I interviewed AmLaw 100 decision makers for the LegalBizDev Survey of Alternative Fees, many commented on clients’ initial reluctance to make the switch. As one senior partner put it: “At least half of the time, maybe more, when the client says alternative fee, what they are really saying is, ‘Give me a larger [hourly] discount than you gave me before.’” Another survey participant said:

What we hear regularly, probably every week, is, "Wow, that was such an innovative fee proposal. It was really good to see that your firm is thinking outside the box and is willing to take risks and partner up with us, and put skin in the game. Now let’s talk about how much of a discount you’ll give us."

Lawyers who would like to believe that non-hourly arrangements will go the way of pet rocks and Britney Spears often quote this type of client reluctance as a reason to believe that AFAs are just a passing fad. But it is important to distinguish between the difficulty of taking the first step away from hourly, and the ease of continuing down that path.

According to national survey data, AFA revenue is growing, albeit rather slowly. According to Altman Weil’s survey of Chief Legal Officers, the percent of non-hourly fees went from 11.9% in 2009 to 14.5% in 2010. Similarly, when The American Lawyer asked the heads of AmLaw 200 firms “what percentage of your matters included a value-based/nonhourly fee component,” the answer was 14% in 2009, and 16% in 2010.

Tucker Ellis & West is on the leading edge of this movement, and other firms may never get to the 60% they have already achieved. I agree with the AmLaw 100 chairman in our LegalBizDev Survey of Alternative Fees who predicted that “You’re going to see a very wide spectrum, a much greater differentiation among law firms as to how they do business than you’ve ever seen before.”

In the future, some firms may be very successful offering nothing but traditional hourly arrangements, and some clients may take a very long time before they will conduct their first non-hourly experiment. I predict that journalists and bloggers will continue to quote case studies and anecdotes from these firms and clients to support the argument that hourly arrangements will never change. But I also believe that all of the momentum is away from hourly arrangements, and towards alternative fees.

Once clients cross the border, they won’t turn back. They will see for themselves that, as Morford put it, “If you pay for hours you get hours, and if you pay for results you get results.” Alternative fee revenues will therefore continue to rise, slowly at first, and then more quickly as the movement reaches a tipping point.

If you are skeptical, consider the situation from a client’s point of view. If you hire someone to redesign your kitchen or fix your car, would you prefer to pay by the hour or to get a fixed price you knew you could count on? In our experience, law firms love to sell services by the hour, but they almost never buy them that way. When I asked LegalBizDev principal Steve Barrett about his twenty years of experience working for AmLaw 100 firms, he told me that he could not remember a single instance in which they purchased services on an hourly basis. They know better.

When I asked Joe Morford whether he had any advice to other firms that are just starting out on this transition, he said:

"Project management is the key to success, and it is very hard to roll out to attorneys. People think if they get a computer program they will be doing project management, but in fact it is much harder than that… We discuss project management at every partner meeting. But aligning interests and working smarter have benefits both to our clients, and to us. It is simply a better way to practice law."